US stocks fell again this week as investors navigated a deluge of bad news.
Central banks around the world have struggled to combat soaring inflation by raising the cost of borrowing without hurting long-term growth prospects. Adding to the uncertainty and fear are growing tensions between the West and Russia following Moscow’s invasion of Ukraine.
In the United States, the S&P 500 – an indicator of the health of retirement savings and university accounts – fell this week to its lowest level in almost two years and was forecast for a monthly decline of almost 8%. .
The tech-heavy Nasdaq 100 has fallen nearly 33% so far in 2022, the Dow Jones Industrial Average has lost more than 20% while the world’s best-known cryptocurrency, Bitcoin, has lost nearly 60% of its value. House prices are also falling as interest rates soar, making loans to potential buyers more expensive.
The Federal Reserve, the nation’s central bank, is tasked with tackling the highest inflation in decades and has done so by raising interest rates. But can it raise the cost of capital to reduce demand and moderate prices without plunging the economy into a deep recession?
“It really is a no-win situation at this point. Largely because of the number of shocks policymakers have had to deal with,” Cristian deRitis, chief economist at Moody’s, a New York-based research firm, told Al Jazeera.
How much further can stocks fall? What exactly is a bear market? And is there a light at the end of the tunnel?
Here is the short answer.
I keep hearing that the US is in a bear market. What is it exactly ?
A bear market occurs when a broad stock index plunges more than 20% from recent highs.
Why is the United States currently in a bear market?
“Ongoing concerns about inflation and the Fed’s ability to rein in prices without a hard landing,” says Peter Essele, head of portfolio management at Massachusetts-based Commonwealth Financial Network.
What is the reason for high inflation and why are prices spiraling out of control?
Kenneth McLaughlin, a professor of economics at Hunter College in New York, told Al Jazeera that one reason is that the federal government is “pushing $5 trillion into the economy, including through controls on relaunch during the pandemic, with kind of good intentions but no intention to pay for it.”
In other words?
Think back to the start of 2020, when businesses closed and economies came to a halt to curb the spread of the coronavirus. Millions of Americans have found themselves locked in with nowhere to go and spend the stimulus checks fresh off the press. This sent stock prices skyrocketing, be it stocks, bitcoin, and real estate prices in the United States. It has also caused a sharp increase in the demand for goods and this, as we are now seeing, has led to the biggest increase in the cost of living in decades.
How does this cause the stock market to fall?
As the Fed raises rates, which essentially raises the cost of borrowing in order to drive down the price of goods and services, people are beginning to fear a slowing economy. This drives down the price of stocks and other investments.
Are the current economic conditions really just a consequence of what has happened over the past 2 years?
The past two years have been unprecedented in many ways. But what we see today can also be attributed to the extremely low interest rates of the past decade when, in the wake of the 2007-2008 financial crisis, the government made borrowing cheaper for Americans, Essele told Al Jazeera.
Didn’t the markets just have a rally?
Stocks rallied in August. Things were looking up when gasoline prices, which had skyrocketed in previous months, fell sharply. Investors remained hopeful that the Fed might ease interest rate hikes if inflation figures for August showed consumer prices had fallen. But despite cheaper gasoline, food and other essentials, prices remained high – up 8.3% in August from a year earlier.
Where are we now?
“Inflation is becoming more structural and investors are now worried about stagflation,” Essele told Al Jazeera, suggesting the price rises could be here to stay. Stagflation is a combination of the words “inflation” and “stagnation” and refers to a situation where inflation is high even as the rate of economic growth slows.
So what does the future hold for us? And how long will this bear market last?
Expect above-average pricing pressures. The war in Ukraine and growing tensions between the West and Russia are adding to the uncertainty and will continue to scare investors and trouble markets.
“But we’re probably three quarters into the bear market,” Essele predicted.
I don’t own any stocks, why should I care about a bear market?
While stock market investors are most directly affected by a US bear market, there are spillovers to the rest of the economy primarily due to the “wealth effect”. In other words, as households see the value of their pension and equity portfolios decline, they will reduce their spending.
“Given the reliance of the US economy on consumer spending, this impact can be significant and widespread,” Moody’s deRitis told Al Jazeera. “Discretionary sectors such as travel, leisure and hospitality may feel the most immediate effect, but other industries such as housing and retail will see reduced demand as households become cautious. “